Company Notes Digest 4.20.17

Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

This was the first full week of earnings season and as usual the schedule was heavily populated by banks. The commentary was definitely more subdued than I expected it to be. Optimism has ticked lower from the start of the year. CEOs are citing a lack of progress in Washington for the downtick. Still, optimism overall is higher than it had been and there’s a good chance that pent up demand will take over regardless of what happens with tax reform in Washington.

The Macro Outlook:

Despite optimism, growth hasn’t yet materialized

“Loan growth, despite the optimism for change in a more business-friendly administration, has yet to materialize in a meaningful way…The net result is that our outlook for loan growth for the full year of 2017 is a little lower than it was in January.” —M&T Bank CFO Darren King (Regional Bank)

Companies are more skeptical than they were

“The first quarter was an interesting one, as we entered it with a lot of optimism about what the new administration might do to further improve the economy. As the quarter continued, some of this optimism has slowed and now companies are more cautious or skeptical about what shape some of the programs, including tax reform, infrastructure projects and ACA reform will take and when they might actually take effect, if at all.” —Brown and Brown CEO Powell Brown (Insurance Broker)

Expectations for policy changes have become more muted

“anything on the corporate tax rate front is positive to Morgan Stanley, and it appears likely whether it’s this year ultimately or next year, there will be movement on that rate. I suspect it will be a little more modest and some of the numbers that have been thrown out. But nonetheless, anything sub 30%, appears probable would be very positive.” —Morgan Stanley CEO James Gorman (Investment Bank)

The yield curve is falling along with expectations

“So, because that stimulus hasn’t occurred, it still may, but certainly is lower probability today than it was in November and December. They were back down in lower 10-year rates, lower mortgage rates than we were there for a while. And now we have to ask ourselves again, are we going to be lower for a while, lower for longer or are we still awaiting for a shoe to drop in for there to be a big backup in rates?” —Wells Fargo CFO John Shrewsberry (Bank)

Businesses are awaiting clarity from policymakers

“During the first quarter of 2017, commercial loan growth was sluggish across the industry. Our large corporate customers tell us that they are optimistic about the future, but are awaiting more clarity regarding potential changes in tax and regulatory reform, infrastructure spend and trade policies.” —US Bancorp CEO Andy Cecere (Regional Bank)

“we haven’t seen the pipeline deteriorate materially, but we’ve seen people not following through to date and accepting those loans and moving forward. In general, when we talk to our RMs and talk to the customers, I think the general sentiment is one of optimism, but they’re in kind of a wait-and-see mode. And they’re just waiting, I think, for more certainty about which direction the administration is going to go” —M&T Bank CFO Darren King (Regional Bank)

Congress is waiting for guidance from the administration

“With respect to tax reform and what we expect to happen, I was actually just in Washington last week and one of the things that I think is very clear is that the House has a plan that they want to move forward which includes the border adjustment tax, that has not yet been adopted by the Senate…I would say the grand summary from my takeaway was that both the House and the Senate are waiting for guidance from the White House on whether they prefer the border adjustment tax or whether they have another vehicle that they would like to implement. And while everyone is waiting for that, things have in fact stalled” —Johnson & Johnson CFO Dominic Caruso (Healthcare)

If Washington doesn’t act it could certainly stall the economy

“If they make no progress in Washington at all then eventually that optimism will turn to pessimism and…capable of a return into recession… I don’t think it will wane immediately, but by the end of the year let’s say if there’s been no positive movement on taxes regulation, healthcare and all that combined then I will be very worried to be honest.” —BB&T CEO Kelly King (Regional Bank)

On the other hand, companies may be eager to get moving either way

“But here is the reason that the resiliency of the activity in the marketplace will be stronger than you might think. Remember that eight plus years these companies have not been investing. They’re using 20 year old computers. They’re driving trucks of 300,000 plus miles. At some point regardless of how frugal you want to believe you can’t got a replacement of few computer and buy few trucks. And then the other thing is kind of a psychology and that is after feeling bad and conservative…you kind of want to invest. So number one, they need to invest, number two, they want to invest.” —BB&T CEO Kelly King (Regional Bank)

International:

The administration seems to have softened its rhetoric on Mexico

“So I don’t see an issue with Mexico. I think the administration has softened or kind of moderated its stance. There’s a recognition that we need to be good trading partners. Maybe the NAFTA agreement should be modified. I think it’s been around for a long time and I think both parties will benefit from a new look at that, but I think it’s going to be a prudent, pragmatic review. So I don’t have any concerns, any issues with trade with Mexico. ” —Steel Dynamics CEO Mark Millet (Steel)

There’s a sizable spread between Brazilian interest rates and inflation

“we’re in a situation where I think interest rates in Brazil around about 13%, inflation is around about 4%. What you see within our distributors and wholesalers and within the trade is a bit of a credit crunch if you like, you see a lot of tendency to put and take money out of inventory investment and put it on deposit where you make a 13% return against only 4% inflation, so it’s quite a good place to invest at the moment.” —Unilever CFO Graeme Pitkethly (Consumer Packaged Goods)

Financials:

Hedge funds are struggling to survive this low return environment

“long term returns are structurally lower than they were 10 and 20 years ago. So if you have an expected long term return of let’s say 6%…Fees take up a lot of that return…I think this is one of the big issues around hedge funds and why we are constantly reading about some hedge funds closing some hedge funds are lowering their fees because the fee structures are just too large versus the returns on a risk adjusted basis” —Blackrock CEO Laurence Fink (Asset Management)

Discount brokers are trending towards zero-cost trades

“First of all, the good news is that even if commission rates went to zero tomorrow, we’d still be profitable…If you remember, there are zero dollar players in the marketplace now and have been for quite some time. It’s been tried for many, many times over the years.” —TD Ameritrade CEO Tim Hockey (Broker)

“as far as advertising these goals, if they really were to cut the commissions to zero, as Schwab for example could easily do…” —Interactive Brokers CEO Thomas Peterffy (Broker)

M&A activity has been sluggish, but Goldman is optimistic

“So the pipeline is good and we’re cautiously optimistic. Many of the factors that one would look for remain in place, so CEO confidence, attractive financing levels, relatively supportive equity market backdrop. So I’ll say cautiously optimistic.” —Goldman Sachs CFO Martin Chavez (Investment Bank)

“Not a lot of chatter about interest rates, I can tell you the sales people in our company today feel as good about the market as they have ever. Traffic numbers are up. We’re selling houses, we’re well positioned against competition, where we have competition and it’s just a good time to be in the business.” —DR Horton CEO David Auld (Homebuider)

Consumer:

Consumer spending isn’t robust

“On the US, I think there’s a general observation here and that is pretty weak consumer demand and that’s not a particular issue here for Nestle. I think that’s all throughout…category by category, whether it’s us or anyone else, what you’re seeing is fairly soft demand, even in the face of pretty good fundamental economic data.” —Nestle CEO Mark Schneider (Consumer Packaged Goods)

Technology:

The mobile device market grew by 10% last year

“We estimate that approximately 1.7 billion 3G/4G devices were shipped in 2016, up approximately 10% year-over-year. For calendar 2017, we are reaffirming our estimated global 3G/4G device shipments of 1.75 billion to 1.85 billion devices, up approximately 6% year-over-year at the midpoint.” —Qualcomm CFO Derek Aberle (Semiconductors)

Reed Hastings has his sights set on YouTube

“Well, I’m – we’re super excited expecting to cross 100 million this weekend, that’s a big accomplishment. But it’s really just the beginning. When you look at YouTube having a billion active users and a billion hours every day…we definitely got YouTube envy” —Netflix CEO Reed Hastings (Media)

Materials, Energy:

Banks are releasing reserves on energy loans

“we’ve been releasing reserves on energy now for a few quarters and a lot of that has really been as a result of payoffs and pay-downs. Now we’re starting to see the risk rating upgrade…as long as energy prices remain relatively stable, we’ll be seeing upgrades and pay-downs approved as credits. And therefore, there will be an opportunity for us to release more reserves on Energy.” —Comerica CCO Pete Guilfoile (Regional Bank)